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Same thing happened to me on my FJ1200 - oil light comes on...time to change underwear... ;D
The annoying thing about the FJ is the low fuel light is also red - it came on one night and I'm thinking it's the oil light and expecting to see a hole in the cases or something >:(
The Seca 750 was a really capable bike and on the street would outperform most of the other 750s of the day. Unfortunately Yamaha hit it with the ugly stick and it never got the credit it deserved.
But yeah - if you want to cut one up and swap wheels it's harder with a shaft drive bike. But...
We'd probably need more info, but the KZ400 had a single indicator idiot light, so the diodes may be for that.
If you can trace the wires colours through a wiring schematic that will probably tell you why they are there.
Having the pistons / pads sit properly over the face of the disc is ideally what you are after. Other than that, I'd say you wouldn't want too much less than about 4 or 5mm - especially with a floating caliper.
The thing about running 4 strokes without oil and seizing them is it's normally not just a case of a new piston and hone - it's more than likely a shot cam, lifters, big/small end and crank as well.
No harm in taking what you've got apart of course - but ultimately putting in a Lifan would...
If the bike has been sitting for a time the clutch plates will stick together and spin the wheel like you have described.
As long as the clutch works with the wheel on the ground this is normal. Dont try and stop the moving wheel with your hands.
As for your neutral light, I suspect you...